Romney May Have Used “Loss Harvesting” To Avoid Paying Taxes. What The Crap Is That?

by evanmcmurry

The current theory about why Romney won’t release his tax returns is that he didn’t pay any taxes in 2008 or 2009. Via Ezra Klein:

But Daniel Shaviro, a tax professor at New York University, isn’t so sure [Romney paid taxes]. “I think there’s an excellent chance that [Romney] didn’t pay any taxes in 2008 or 2009,” he says. But to get from a small federal tax liability to no federal tax liability, Romney would have needed to engage in incredibly aggressive tax planning. Shaviro mentions picking loser investments to get some benefits from “loss harvesting,” unusual tax shelters, and a bevy of other stuff that, frankly, I don’t totally understand.

Hold up! “Loss harvesting?” What the crap is that? Here’s the Wall Street Journal:

In the midst of market turmoil, it is easy to forget how generous the U.S. tax code is to investors. Not only is the 15% top rate on long-term capital gains less than half the top 35% rate that wage earners pay on their salary, but the rules also provide a way to use losses to reduce or even wipe out tax on current and future gains—raising overall returns.

Here is the gist: Say Tom bought $10,000 worth of the Acme Fund 14 months ago. He still likes the fund, but now his shares are worth $7,000. If he sells, he can rebuy a similar fund right away and book a $3,000 loss to offset taxes on other gains or even his wages.

If the fund recovers, Tom may owe slightly higher capital-gains tax far down the road. Meanwhile, he has sheltered $3,000 from taxes today at rates as high as 35% and has extra money to invest.

Advisers call such sales “tax-loss harvesting” and recommend them to investors with taxable accounts. (It doesn’t apply in tax-favored retirement accounts.) “Loss harvesting is a terrific benefit,” says Joel Dickson, a tax specialist at Vanguard Group, “and we urge investors to take Uncle Sam up on it.”

To be clear, these are actual losses suffered by the shareholder. But in this case, you sell a stock you already own but that’s lost money, and buy one identical to it; you end up with the same amount of stock, but you’ve written off the losses in the meantime, a tax write-off that can be applied to wages or profits elsewhere. Mike Bloomberg, for instance, used loss harvesting to pay no taxes in 2010, and some are so good at gaming the system that they use the tax credit to buy better stocks, recoup the benefits, and then transfer the remainder to someone in a lower bracket to avoid paying higher taxes on the gains from the better stocks they bought from the tax credit they got from the loss.

Remember, this is the tax code that’s supposed to be so unfair to “job creators” that they can’t create jobs.

There’s nothing illegal, or even that shady, about loss harvesting, but its optics, from its name on down, are terrible, starting with the fact that the rich have so many advantages they can even make money on losing money, and have so gamed the tax code that they can shirk their share coming and going.

What’s most amazing about this is that if Mitt Romney did engage in loss harvesting (we don’t know if he did because he won’t release his tax returns), he did it while gearing up for his 2012 run for president, knowing full well his fiscal behavior would become an issue if he got anywhere close to the White House. A good argument that Romney won’t be able to put country before profit can be made from the fact that he was unable to resist putting profit before his own presidential run.